Presenting Arms

Corporate Research E-Letter No. 34, April 2003


by Philip Mattera

If you look at the websites of the leading U.S. military contractors these days, you would hardly know that the country has been at war. There are no boastful press releases about the role played by their products in obliterating the Iraqi military. Ads run by the contractors have consisted mainly of flag waving and troop praising.

At the same time, many financial analysts have taken pains to argue that the U.S. invasion won’t do much financially for the likes of Lockheed Martin, General Dynamics and Northrop Grumman. “War Won’t Be A Windfall for Contractors, Analysts Say,” was the headline of a late March article in Aerospace Daily.

The attempt to downplay war profiteering suffered a setback when the big contractors started to announce their first-quarter financial results this month. Lockheed reported an 18 percent increase in revenues and a 23 percent rise in operating profits. Raytheon saw a drop in earnings, but that was caused by pension costs and problems with its corporate jet unit; the company’s military units all enjoyed substantial gains. Boeing also experienced a rise in military sales while its commercial aviation business slumped. Many of these gains are attributable more to the military build-up preceding the U.S. invasion than the war itself, but some companies are profiting directly from the fighting. Raytheon, for example, is being pressed to replenish the Pentagon’s supply of Tomahawk cruise missiles, hundreds of which were fired on Iraq.

The main benefit the contractors received from the U.S. invasion may have been more in the realm of marketing than sales. In a sense, the whole war was one big infomercial for their wares. For weeks, television news was filled with glowing descriptions--and often dramatic footage filmed by embedded journalists--of warplanes and missiles.

All of this hype will help solidify U.S. public opinion in favor of increased military spending. It will also stimulate demand from foreign government customers. As the Washington Post put it, “The new weapons are being featured in nonsTop television coverage, providing the kind of publicity that helped fuel a surge in international arms sales after the 1991 Persian Gulf War.”

Weapons makers have also gotten a boost from the U.S. commander in chief. On April 16, President Bush went to a weapons plant in St. Louis to sing the praises of the industry. He told workers at a Boeing F-18 factory: “The quality of the workmanship that goes into the aircrafts that you build here is one of the main reasons why we were successful in making the world a more peaceful place.” Bush gave another boost to the industry when he appeared at a General Dynamics plant in Ohio on April 24 and lauded it for providing the American military with “the most effective armored vehicle in the history of warfare--the mighty Abrams tank.”

Now that the Bush Administration has become the de facto marketing department of the arms industry, it is worth taking a closer look at how that business has been affected by the war in Iraq. As a contribution to that effort, here are brief profiles of the leading U.S. weapons contractors, their products, their “performance” during the war and their future prospects.

Fiscal year 2002 prime contract awards from the U.S. Defense Department: $17.0 billion
Total 2002 revenues: $26.6 billion; profits: $500 million

When it comes to weapons production, Lockheed Martin--the result of the 1995 merger of Lockheed Corp. and Martin Marietta Corp.--is full of superlatives. The world’s largest military contractor, Lockheed became the recipient of the biggest individual contract when it was chosen by the Pentagon in October 2001 to lead the $200 billion-plus Joint Strike Fighter program. The company is also perhaps most representative of the controversies surrounding military contracting--from its involvement in the 1970s scandals over questionable payments to foreign governments to the way it successfully persuaded the Pentagon in recent years to buy unneeded C-130 transport planes in order to prop up the company’s financial condition.

Lockheed’s product line ranges from missile control systems to F-16 fighter planes. In Iraq its technology was present in many of the Pentagon’s command and control systems as well as in the sorties flown by its F-117 Stealth fighter, including the attempted “decapitation” strike at the beginning of the war. The company’s U-2 surveillance planes --one of which caused a major international incident when it was shot down in Soviet air space in 1960-- scanned Iraq both during and before the war. The value of the company’s contract backlog has risen to a record $74.6 billion.

2002 prime contract awards: $16.6 billion
Total 2002 revenues: $54.1 billion; profits: $492 million

Boeing derives less than half of its revenues from military sales, but it is still does a huge amount of business with the Pentagon and calls itself “the world’s largest producer of military aircraft.” It attained this position thanks to the purchases of McDonnell Douglas and Rockwell International in the late 1990s. Among Boeing’s lethal products that saw action in Iraq were the AH-64D Apache Longbow attack helicopter (in its combat debut), the F/A-18 Hornet fighter and especially the Joint Direct Attack Munition. JDAMs, a favorite of the retired generals who provided play-by-play commentary on the TV networks, are guidance kits that are said to transform “dumb” air-launched bombs into “smart” ones. Thousands were dropped on Iraq.

The war also saw the use of Boeing’s B-1B bombers (inherited from Rockwell, which had introduced the planes in the 1980s after a long controversy about runaway costs); the troubled CH-46 Sea Knight helicopters (one of which crashed at the start of the war and killed eight soldiers); and B-52 heavy bombers, which date back to the early 1950s and played an infamous role in the carpet bombing of Vietnam. It was a B-1B that dropped four JDAMs on a residential area of Baghdad on April 7 in an apparently unsuccessful attempt to kill Saddam Hussein and other Iraqi leaders. Boeing and its friends at the Air Force are trying to get approval for a dubious plan in which the company could gain up to $30 billion in revenue by leasing 100 of its 767s to the military to serve as refueling tankers.

2002 prime contract awards: $8.7 billion
Total 2002 revenues: $17.2 billion; profits: $64 million

Northrop’s volume of military business will be even higher this year, following the completion last December of its acquisition of TRW Inc., which did $2 billion of business with the Pentagon in fiscal 2002. Northrop previously worked its way up the list of major military contractors with its purchase of Litton Industries and Newport News Shipbuilding. Newport News built three of the aircraft carriers from which much of the U.S. air war against Iraq was conducted. Northrop is the prime contractor on the bat-winged B-2 long-range bomber, which dropped devastating 2,000-pound bombs (so-called “bunker busters”) during the war. The company was recently chosen by the U.S. Air Force to upgrade the navigation system of the RC-135 reconnaissance aircraft.

2002 prime contract awards: $7.0 billion
Total 2002 revenues: $16.8 billion: profits: -$640 million (loss)

Raytheon, whose Patriot anti-missile system performed poorly during the first Gulf War, enjoyed tremendous publicity during the recent fighting for the performance of its sea-launched Tomahawk cruise missile--some 800 of which pounded Iraqi army positions and other targets. Not all the publicity received by the company was positive. It was widely reported that Tomahawks were the cause of a March 26 explosion at Baghdad’s Al-Shaab market that resulted in the death of 14 civilians. Even before the war was over, the Pentagon asked Raytheon to replenish the supply of the lethal weapons, which cost at least $600,000 apiece. At the same time, military analysts expressed concern that the Patriot interceptor missiles made by Raytheon and Lockheed accidentally shot down two Coalition warplanes. During the war the company got a $173 million contract to continue producing laser-guidance kits for the Paveway II air-to-surface bomb.

2002 prime contract awards: $7.0 billion
Total 2002 revenues: $13.8 billion; profits: $917 million

General Dynamics, whose most visible product in Iraq was the revamped M1 Abrams tank, experienced a decline in earnings in the first quarter of 2003, but the cause was a slump in the company’s non-military operations, especially its Gulfstream corporate jets. GD enjoyed what chief executive Nicholas Chabraja called a “superb performance” in its military units. Earlier this month, the company was awarded a $24 million extension of its contract to provide ammunition, mainly for the Army’s Bradley Fighting Vehicle.

2002 prime contract awards: $3.6 billion
Total 2002 revenues: $28.2 billion; profits: $2.2 billion

United Technologies, like Boeing, does not depend on the military for the majority of its revenues. Yet, in addition to civilian operations such as Otis Elevator and Carrier air conditioning, UTC’s units include Sikorsky, a leading producer of military helicopters, and Pratt & Whitney, a major manufacturer of jet engines for the Pentagon. Both of the latter two units have been enjoying substantial revenue growth in their military work, while their civilian aerospace work has been slumping.

Sikorsky was the source of one of the rare corporate press releases relating to the war in Iraq, but the focus was on the way in which the company’s H-60 helicopter was used not in combat but rather in the rescue of POW Jessica Lynch. Military analysts have expressed concern over reports that several of the company’s Black Hawk helicopters were downed by small arms fire. During the war, UTC received several new awards, including a $481 million supplement to its contract to produce engines for the F/A-22 Raptor fighter aircraft.

2002 prime contract awards: $1.7 billion
Total 2002 revenues: $4.0 billion; profits: $178 million

L-3, formed by  Lockheed’s 1997 spinoff of ten military communications technology units, is a new member of the billion-dollar club of Top Pentagon prime contractors. In fiscal year 2002 it jumped to 10th place on the contractor list, up from 26th the year before. L-3’s products help make possible the networked battlefield that was so hyped during the Iraqi war. The company, which reported a 56 percent leap in revenues during the first quarter of this year, was recently awarded a $1.5 billion contract to provide logistics support to the U.S. Special Operations Command. L-3 has also been in the news because it is the parent company of SYColeman Corp., whose president, Jay Garner, is on leave to serve as the U.S.-designated civilian administrator of postwar Iraq.